October wasn’t a great month for investors in AstraZeneca (LSE:AZN) shares following the release of disappointing results for the firm’s latest lung cancer drug. But does the resultant drop in the share price now present an opportunity for investors?
What went wrong?
AstraZeneca’s experimental precision drug, datopotamab deruxtecan, showed fairly mixed results in a late-stage trial. The drug unfortunately only improved the time patients with non-small cell lung cancer live without their disease worsening by 0.7 months compared to chemotherapy. This clearly did not meet analyst expectations, with one calling the results “worse-than-expected“, sending shares down over 3% on the day.
However, the safety data was better than expected, with only three drug-related deaths in the study compared to two in the chemotherapy arm. Overall, the data abstracts were not as exciting as some analysts had hoped, but there are still some positive signs for AstraZeneca.
How does the company look generally?
Clearly, there is more to AstraZeneca than just one drug. With over 83,500 employees, and revenue of $45bn, there are plenty of areas which the company can look to to absorb some of the lost potential income from a recent disappointment.
From the perspective of an investor, analysing a biopharmaceutical company can be a challenge, since the source of revenue is highly technical, requiring specific knowledge. However, with a company the scale of AstraZeneca, the portfolio of approved and widely used drugs obviously bring more stability and certainty than a company with only a single drug awaiting approval.
Compared to the wider biopharmaceutical sector, which has an average price-to-earnings (P/E) ratio of 19.4, AstraZeneca has a slightly more expensive P/E ratio of 31.3. The company is growing earnings at 18.3% a year, slightly above the sector’s average of 17.1%. These are fairly solid numbers in the context of an uncertain economy. However, with plenty of competition in the sector, this growth isn’t a guarantee for the future.
Are AstraZeneca shares at my buying level?
For me, I want to be buying quality companies below their fair value. My preferred means for identifying this is a discounted cash flow calculation. Although this doesn’t tell the full story, the calculation suggests there could be growth of 47% before the fair value of £193.04 is realised. Analysts also expect AstraZeneca will have a good year ahead, generally agreeing on a target price 20% above the current price. Of course, analysts can get it wrong.
Before I buy any AstraZeneca shares though, I want to have a clear understanding of how healthy the company’s debt is, since interest rates are likely to remain high for the foreseeable future. With over $29bn of debt, and a debt-to-equity ratio of 64%, I think this could become a concern for investors. At some point, the management team may choose to cut the dividend, or take steps to manage debt, which may again send investors to the exit.
As much at the company looks to be in relatively good health, besides the debt, I think there are better places for my money to work. The biopharmaceutical sector still looks to be finding its feet again following the turbulence of the pandemic, so I’ll be keeping clear of AstraZeneca shares until things look a little more certain in the economy.
